ABN AMRO Private Banking Outlook June 2018

Investment Outlook | June 2018

Still on course

Contents

INTRODUCTION 3 STILL ON COURSE

4

PORTFOLIO ALLOCATION: CROSSING BORDERS

6

TAILWINDS LESSEN, BUT DIRECTION IS SURE

8

EQUITIES: STILL MOVING IN THE RIGHT DIRECTION

10

POSITIONING FOR DEMOGRAPHIC CHANGE

12

BONDS: NAVIGATING HIGHER YIELDS

14

MORE FOCUS ON SUSTAINABILITY

16

REAL ESTATE: CLEAR SAILING AHEAD

17

PRIVATE EQUITY: STILL ATTRACTIVE

18

COMMODITIES: POSITIVE LONG-TERM VIEW

19

CURRENCIES: EURO UNDER PRESSURE

20

ASSET ALLOCATION PROFILES

21

CONTRIBUTORS 22

This is an international ABNÂ AMRO publication. Risk profiles and the availability of investmentproducts may differ by country. Your local advisor will be able to provide more information.

2

Investment Outlook | June 2018

Introduction

Within this Investment Outlook, we present the views of ABN AMRO Private Banking’s investment team on positioning within financial markets. Positioning in a time when the economy is still doing well, when the economy is still on course, but when politics are disrupting the calm.

It is with great pleasure that I would like to introduce the Investment Outlook for the second half of 2018. I would like to start by thanking Didier Duret, who in the past was responsible for delivering this Outlook to you.

The Investment Outlook has always been well received, and it will be difficult to follow in his footsteps after so many years.

Richard de Groot Global Head Investment Centre ABN AMRO Private Banking June 2018

At the end of 2017, it was our belief that the economy was going strong.

The combination of high growth and low inflation creates a scenario in which financial markets perform well. We also stated to be alert regarding possible risks developing during the year. These have developed, given the possibility of a trade war, political risks in Italy and higher market volatility.

For the remainder of 2018, our view has not changed much. Economic indicators are no longer at all-time highs, but they remain solid. Interest rates have gone up in the US, but we still see few signs of inflation. Overall, we believe that the economy is still on course. We therefore continue to recommend risky assets, such as stocks, for your investment portfolio.

In this edition of the Outlook, you will further find an article about sustainability and the impact that the different environmental, social and governance considerations have on the future performance of companies.

In addition, we explain why diversification via an international portfolio is so important, both from a return and a risk perspective.

ABN AMRO Private Banking’s investment team, who are responsible for this Investment Outlook, provides more information on their recommendations in the pages that follow. Your Relationship Manager or local investment professionals stand ready to assist you to prepare for what is ahead in 2018.

Richard de Groot

3

Still on course The economy is still on course, despite the distractions of geopolitics and a return of market volatility.

While market noise may have increased, investment fundamentals are in good shape.

Headlines can be deceiving. We have all read stories that

Large market fluctuations may continue

begin with a bold title, while the story that follows is more

Financial markets do not like uncertainty. If there is

balanced and nuanced. An alarming headline can grab atten-

uncertainty, for example, about a potential trade war,

tion, but it can also distract from the true story. This is espe-

then markets will fluctuate more. We expect that stock

cially true if the news is written in tweets of max 280 char-

prices will go up and down much more than we have

acters by the US president.

seen over the last 12 months. This is likely to continue through the end of the year.

We believe that despite the headlines seen in the first half of the year, the underlying story remains positive. The economy is doing well and this will likely continue through 2018 at least. The recovery in economic growth, which has

…but market and company fundamentals are still strong

been slowly strengthening since the end of the financial crisis, has proven to be exceptionally long and, at times,

Economic growth is stabilising and still solid

surprisingly resilient. Despite soft spots and worries, we are

The world economy is expected to grow by 3.9% this

still on course to a ‘more normal’ market environment where

year and we expect growth of above 3.5% in 2019. For

central bank support will no longer be needed. We expect

the US, growth this year is expected to be slightly higher

that this transition will be carefully managed and clearly

(3%) than for Europe (2.8%). The economic outlook

signalled.

therefore remains solid and supportive for investing.

There are some potential challenges on the horizon…..

Central banks are still on course back to ‘normal’ rates Central banks have been clearly communicating their strategy and are expected to stay on course back to more normal monetary policies. In the US, this means

Geopolitical concerns need to be monitored

interest rates will gradually rise, but at a slow pace that

Political risks have increased. This was clearly seen when

will not damage economic growth. In Europe, we are

the Trump administration suddenly started imposing

further from this transition, owing to slower economic

tariffs, particularly for Chinese imports. This could have

growth and lower inflation. As such, we do not expect

the potential to lead to a full-out trade war that would hurt

interest rates to rise in the eurozone until 2019.

economic growth. But we do not expect this to occur, as it is to the benefit of both sides to find a solution. The same

Company earnings remain robust

applies to the turmoil in Italy, no euro crisis is expected.

Solid economic growth and favourable financial conditions are supporting company earnings growth. This

Future growth signals have gone from great to good

is positive for dividends - the portion of earnings that

In predicting future growth, we often look at macroeco-

companies distribute to investors – and also enables

nomic indicators that act as forward-looking signals. For

company managers to invest more in their businesses.

Europe, such indicators had weakened. But, they weak-

Such capital investments can lead to higher productivity

ened from what had been unsustainably high levels.

and pave the way for future growth.

Nonetheless, further declines could signal lower growth and such indicators need careful attention.

4

Investment Outlook | June 2018

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of sectors, we prefer the energy, consumer discretionary

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returns to be well above the returns on cash and govern-

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stock-market returns this year, but we do expect equity

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EQUITIES

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We do not believe investors should expect double-digit e

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There are still opportunities to drive portfolio growth Stocks remain the engine of portfolio returns

g

ng

er w

i

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ro

e

n e u t r al

t gh

BONDS

and industrials sectors.

Thematics can play an important role in your portfolio Investing in certain global themes or trends can be a good addition to your investment portfolio, because these trends likely will continue despite fluctuations in economic growth. Thematic investments therefore have the potential to perform well under different market circumstances and to add diversity to stock portfolios.

Three demographic trends that are driving changes and which will present investment opportunities are related to the increasing number of people who are 80 years of age or older, the impact of a declining workforce and the lifestyle of millennials.

Rebuild exposure to bonds as yields rise and diversify As central banks are, in general, on a slow path to increasing interest rates, the moment to start investing more in bonds is coming closer. A rising yield environment is always challenging for bond markets. We suggest seizing this period as an opportunity to gradually rebuild exposure to government bonds and to re-establish the diversifying role of bonds in overall investor portfolios. We also suggest diversifying bond portfolios that have a strong exposure to corporate credits. As growth matures and the European Central Bank gradually exits from its investments in corporate credits, investors should consider diversifying by increasing international exposure and by investing in segments with different risk characteristics that still promise good returns.

Richard de Groot Global Head Investment Centre

5

Portfolio allocation: crossing borders Many sophisticated private investors have a bias for investing in their home markets. While it is a natural tendency to prefer local markets, it can limit portfolio diversification and investment returns.

More performance for risk A global, diversified investment approach can take advantage of internationally varied growth trends and their associated opportunities. At the same time, it can help to reduce risks. Diver-

For successful investing, it is essential to use all sources of

sification is based on the idea that a portfolio constructed with

return. This inevitably leads to the concept of broad diversi-

different types of investments will over the long run yield higher

fication, encompassing all regions of the world. Even asset

returns at any preferred level of risk than any individual invest-

managers without a wide international presence can imple-

ment found in the portfolio. This is because different markets

ment this, as we do at ABN AMRO, using our local European

do not typically move in lock-step, which can protect portfolio

expertise to successfully act in markets around the world.

returns when downturns occur in one market but not another.

Looking at three-year investment returns, it is easy to see

The relationship between risk and return and the advantages

why a global investment approach is crucial to investment

of diversification can be seen in the Figure. All efficient

performance. Over the past three years, for example (as of 28

portfolios are plotted on the line, noted as the “efficient

April), the Dow Jones Index gained 39%, the Nasdaq Index

frontier�.1 It shows the optimal returns for the given level of

51%, and the Euro Stoxx 50 11%. These returns expose that

risk, based on theoretical ideal portfolios. More return is not

US equities are close to record highs, while the Euro Stoxx 50

possible, at least not with standard market securities. As

is more than 30% below its peak. These simple comparisons

can be seen, the returns of the individual market indices are

make clear how a too narrow approach to stock investing can

all well below that of the optimal (efficient) portfolio.

significantly affect performance. And this applies not just to equities, but to all asset classes.

1 The efficient frontier is a theoretical concept designating a set of optimal portfolios that offer the highest expected return for a defined level of risk. Portfolios below the efficient frontier are suboptimal, because they do not provide enough return for the level of risk assumed.

Return

Investing in single markets is not optimal in terms of risk and return 12%

10%

8%

2% 0%

5

3

6

2 1

10

5%

10%

Source: Bloomberg, ABN AMRO Private Banking

6

9

4

6%

4%

Efficient frontier

7

15%

8

20% 25% Volatility

1. Bunds 2. European corporate bonds 3. 30/70 balanced (portfolio 30% stocks and 70% bonds) 4. 70/30 balanced (portfolio 70% stocks and 30% bonds) 5. World equities (MSCI All Country World Index) 6. European equities (MSCI EMU) 7. Emerging markets debt 8. Dutch equities (AEX dividends excluded) 9. German equities (DAX) 10. French equities (CAC 40 dividends excluded)

Monthly data from 1997-2017.

Return and volatility are annualised,

Investment Outlook | June 2018

Home markets still dominate portfolios

companies comprise 4% and the share held by Dutch companies is less than 2%.

Despite the widespread belief and scientific proof regarding the benefits of diversification, not much has really changed

Focusing on home markets and the lost return it can gener-

in terms of investor behavior. For example, the home bias of

ate can be avoided. While it may be outside the “comfort

German private investors is, on average, around 60%-70%.

zone,� a well-diversified portfolio will likely be rewarded

Dutch investors are much more internationally diversified,

over time with an improved risk/return profile.

but also have a home bias. And the average French investor has an even larger home bias than German investors.

Reinhard Pfingsten

By contrast, Germany’s share of the MSCI World, the

Global Head Asset Allocation Services

established index of world equities, is only 3.6%, French

s d n a l r Nethe

Belgium

7

Tailwinds lessen, but direction is sure The US economy is forging ahead at a better-thanexpected rate. Europe has encountered a soft patch – but it is expected to be temporary.

temporary factors may also have played a role earlier in the year, such as adverse weather, a large number of worker strikes and the flu epidemic, for example. Weaker exports, in particular to Asia and Russia, are also a contributing factor.

Economic growth exceeded expectations last year, particu-

The strengthening of the euro over the last 15 months has

larly in Europe and Asia, while the US economy matched

also not helped, but it has not been so much that it should

what had been anticipated. So far this year, economic indi-

have a huge impact. Another issue is trade data, where

cators suggest that the eurozone economy is slowing, as

it appears that world trade growth has slowed so far in

are several economies in Asia. At the same time, the US

2018. This affects the eurozone more than the US, as the

appears to be holding up better. (See Figure.)

European economy is considerably more open to trade, while its dependence on China is also clearly greater.

Stimulus behind US growth

As far as temporary factors have had a role to play, they will obviously disappear. And if China is a culprit, we do

The combination of tax reform, tax cuts and spending

not expect that economy to slow significantly. Instead, the

increases will likely keep US economic growth high. It may

Chinese economy is expected to continue its very gradual

even accelerate, as the stimulus takes effect. Increasing

slowdown. Any deviation from that path will be addressed

stimulus when an economy is not far from full employment

by policymakers. On balance, we therefore do not think that

is an unusual experiment. Concerns that inflation may pick

the slowdown of the eurozone economy will be very severe.

up and that the growing US budget deficit may push interest

We expect economic growth to remain above its long-term

rates higher are easy to understand. We believe, however,

trend.

that the rise in inflation will be modest. This is because countering forces, related to technology, are likely to keep

The combination of strong corporate earnings, low interest

inflation in check.

rates, the availability of credit, the tight labour markets and the rapid progress of technology make it likely that compa-

Moreover, the increase in the funding required by the US

nies will step up investment spending. Judging by capital

government to pay for its stimulus measures is not likely to

goods orders placed with German and US producers, this is

cause big problems any time soon. This is due to the global

now being seen.

appetite for ‘safe assets,’ such as US government bonds.

Next year may be a different story, however. The policy stimulus will be wearing off, and the gradual, continued tightening of monetary policy will start to bite. We therefore

Investment growth leads to productivity growth

expect lower US growth in 2019.

Stronger investment growth will contribute, over time, to

Soft patch in Europe, but not severe

higher productivity growth, which will limit inflation. That is why we expect the key central banks to tighten only at a very slow pace. We expect that the US Federal Reserve will

While confidence indicators in Europe have weakened,

continue to raise rates by 25 basis points once every quarter

it is not clear why European growth would be softening.

this year. The European Central Bank (ECB) is expected to

Confidence indicators had been at exceptionally high levels,

continue its asset purchases, as promised, until September

and this may be why they have retreated. Perhaps some

and will then probably take quite a while to end them

8

completely. Rate hikes by the ECB are not on the agenda

One of the risks to continued global economic growth would

until well into 2019. The Bank of Japan is also expected to

be a full-blown trade war. We think, however, that what we

continue its accommodative policies until inflation moves

are actually witnessing are aggressive negotiating tactics.

close to their target rate.

No full-blown trade war is expected. And while the situation in Italian politics is a concern, we do not believe that another chapter of the euro crisis is unfolding.

Han de Jong Chief Economist

There is a shift in circumstances between 2017 and 2018 in the US and Europe PMI Index

Manufacturing PMI 64 62

Europe US

Forecasts: Economic growth and inflation (%)

60

25 May 2018

58 56 54 52 50 May '15

Dec '15

Jul '16

Feb '17

Sep '17

Apr '18

Real GDP growth

Inflation

2018

2019

2018

2019

US

3.0

2.7

2.1

2.0

Eurozone

2.8

2.3

1.7

1.4

Japan

1.7

1.3

1.0

0.8

UK

1.4

1.7

2.3

1.9

China

6.5

6.0

2.5

2.5

World

3.9

3.7

3.4

3.2

As measured by indexed PMI manufacturing data in Germany and the US.

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/

Source: Bloomberg

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

9

Equities: still moving in the right direction Volatility returned to equity markets in the first quarter, triggering investors to question if we are at the end of the bull market. Our answer, for the time being, is no.

Fundamentals remain supportive Despite the increase in market volatility, we believe that economic and company fundamentals will continue to support stock markets for the rest of 2018. World economic

Continuing economic growth, strong corporate earnings and

growth is set to continue, and will feed corporate earnings.

the modest tightening of monetary policies by central banks

Analysts, for example, expect earnings growth of around

should continue to support stock markets. But given that

8% in Europe and 20% in the US in 2018.

we are in new territory, after an extended period of very low US earnings are being boosted by the Trump administration’s

interest rates, we need to stay alert.

tax reforms and companies using extra cash for corporate Investors were jolted to attention in February. After several

buybacks. Analyst growth expectations were confirmed in

quarters of calm, and a strong start to the year, market vol-

the first quarter, when overall, US company earnings grew

atility made a huge comeback. Stock markets dropped by

by almost 24%. It is therefore likely that the ongoing bull

10%. The VIX Index, which measures market volatility (and

market will continue, given that earnings constitute a key

is also known as the Fear Index), jumped.

driver of market performance.

One explanation for the surge in market nervousness is that investors repriced risks regarding the economic and mone-

Share prices have become less expensive

tary outlook, factoring in the possibility of higher inflation and more interest rate hikes than had been expected by the

Since the market correction in February, traditional valua-

US Federal Reserve. Later, these fears receded.

tion metrics are also more realistic. Price earnings multiples, currently at 14 for European markets and 17 for US markets, are close to their long-term averages. Valuation metrics,

Market volatility spiked in 2018 and remains elevated

price per share to the company’s book value per share) also confirm the potential for a further increase in equity markets this year.

US market volatility European market volatility

40

such as the price-to-book ratio (i.e. the ratio of the market

Neutral stance on regions

30

Despite the positive outlook for stock investing in general, 20

both emerging and developed markets are suffering from intrinsic weaknesses. We are therefore neutral regarding regional investing. Despite relative undervaluation, emerg-

10

ing markets are very sensitive to the tightening monetary policy of the US Federal Reserve and to fluctuations in the US dollar. European markets appear attractive compared

0 Jan '16

Aug '16

Mar '17

Oct '17

May '18

to the US, but economic and earnings fundamentals are weaker in Europe. Finally, US markets have been in the

Source: Bloomberg

10

Investment Outlook | June 2018

lead for some time given the large size of the information

We remain neutral on the technology sector. It is suffer-

technology sector, but valuations in the sector have become

ing from high valuations, despite strong sales and earnings

expensive. We therefore advise wide diversification to avoid

growth. The sector’s volatility has also been elevated over

too large a concentration in any single market’s challenges.

the past three months. Areas of the market that we do not find attractive include the telecommunications and utilities

Invest in sectors exposed to economic growth

sectors as well as most of the consumer staples sector – companies in these areas tend to underperform when interest rates are rising.

We retain our preference for cyclical sectors, which typically

Olivier Raingeard

do well in an environment of economic growth. In particular,

Global Head Equity

we are positive regarding the consumer discretionary and industrials sectors, which can benefit from increasing capital expenditures and consumer spending as the economy improves. We are also positive on the energy sector, which we believe will be supported by an increase in oil prices. The energy sector can also be considered a defensive addition to portfolios, in case of any increase in geopolitical risks.

11

Positioning for demographic change For investors, three trends to watch are the growing segment of the population that is 80 years of age or older (80+), a declining workforce population and the group known as “millennials.�

By 2050, for every 100 people working in Germany, Spain, Italy and Japan there will be around 60 to 70 elderly people to care for. The same goes for some emerging countries, including Korea and China. This means that the next generation will need to work longer and more productively to pay for the social safety

The 80+ group spends differently

net. This also requires continuous education, as jobs constantly evolve. The smaller work force will also require further automation and the use of robots. This is one reason why China is

Most Baby Boomers, who are defined as being born between

setting robotisation high on its national priority list.

1946 and 1964, are retired now or are close to it. But this group will live longer than any previous generation. According to

Not every country is facing such a demographic headwind.

the United Nations, on a global scale, every five years the life

Countries such as the UK and France, for example, are avoiding

expectancy of new borns increases by one year.

a declining workforce, owing to higher birth rates and immigration. For the US, the millennial generation, which is typically

In the coming five years, people who are 80+ will become the

defined as comprising people who are now between 20 and 40

fastest growing population group. It is also one of the wealthi-

years of age, is an offset.

est groups ever seen. The world’s elderly are now enjoying their free time, but with aging, there are significant changes in terms of spending patterns.

The millennials are coming

While Japan is well known for having a large older population,

There are an estimated 2 billion millennials, responsible for 30%

this trend will also soon be seen in Germany, the US, Spain,

of global gross income. Especially in the US and China, this is

Italy, Korea, China and Russia. In the US, the 80+ population

a substantial group. Millennials, in general, are more highly

will grow towards 7% a year starting around 2021. (See Figure.)

The effect of an aging population means an increase in spending on health care, senior housing and products that support

The elderly (80+) is becoming the fastest growing population group in the US

quality-of-life. At the same time, less will be spent on transpor-

%

tation and clothing.

8 7

A declining workforce will drive automation and robotisation Advanced economies are hitting a critical milestone this year.

6 5 4

For the first time since 1950, the working-age population will

3

decline. Japan and Germany, for example, are each projected to

2

see their labour supply decline by one-third by mid-century. For some big countries, this means fewer people to take physical and financial care of the elderly.

2018

1 0 2015

2022

2029

2036

Percent growth of the 80+ population in the US Source: United Nations

12

2043

2050

Investment Outlook | June 2018

educated than previous generations and technology is an integral part of their lives.

A profound difference with the past is the work participation and education levels of women among millennials. Women have already bypassed men in the US in terms of education, as 36% have a college degree compared to 29% for men.

Millennials are more focused on value for money, experiences, sustainability and technology than older generations.

As they work more as freelancers and experience less job security, they can favour renting and sharing assets more than owning them. Increasingly popular among this group is watching professional video-game matches, known as e-sports. In 2017, more people watched the League of Legends finals than the US National Basketball Association finals and the Oscars combined. League of Legends is a multiplayer online battle arena video game.

Investment opportunities One obvious beneficiary of the named demographic changes would appear to be the pharmaceutical sector, but pricing pressure remains high; hospitals and home-care services are benefitting more. Also benefitting are senior-related products, such as for beauty care, hearing aids and dental implants. Travel and leisure will also continue to be in high demand. And in a few years, senior housing providers will see a strong influx of the 80+ population.

Products and services focusing on a healthy lifestyle through sports and sustainably-produced food are also in strong demand, not only from the elderly, but even more so from younger people. Game companies are already benefiting from the rising interest in e-sports.

Piet Schimmel Senior Equity Thematic Expert

13

Bonds: navigating higher yields While an environment of rising yields can be difficult for bond portfolios to navigate, it offers opportunities to rebuild government bond positions at more attractive rates. When taking profits in corporate bonds, we suggest using the proceeds to internationally diversify bond portfolios.

Holding corporate bonds has been generously rewarded over the past years, as stronger economic growth and lower interest rates supported corporate balance sheets. Purchases of corporate bonds by central banks lifted prices further, especially in Europe. Most bond portfolios now contain large positions in corporate bonds, built up in the search for yield.

This was also an attractive segment given the support from

Bond yields have started moving upwards, which is a sharp

central banks. So much so, that it became viewed as a new

turnaround after decades of falling yields. Although US yields

“safe haven” for investors.

are on a different course than Europe’s, it was significant when US ten-year Treasury yields rose above 3% in April.

Now that growth is maturing, corporate bond spreads are approaching their low-point (See Figure.) These spreads are

The overall expected rise in yields is the trend, given synchro-

an indication of the risk premium on these bonds. When they

nised economic growth, rising inflation expectations and

are reaching their lows, they are at their peak of attractive-

tighter central bank policies. Yields, however, will not go up

ness. It marks the time to start reducing this position. Two

in a straight line, and there will be periodic setbacks. The

indicators of this new phase are tighter bank lending condi-

recent fall in core European yields on concerns over Italy is

tions and an increase in mergers and acquisitions activity.

an example of that. In general, it remains a challenging envi-

From the perspective of a bond investor, these are signs of

ronment for bond portfolios, particularly since yields are still

deteriorating corporate balance sheets. In addition, the ECB is

negative in many European segments and coupon income

lessening its support for the corporate bond market by reduc-

has been eroded over many years.

ing its bond purchases.

To stay afloat in this environment, bond investors need to be agile and alert. We suggest using each wave of higher yields to gradually increase bond holdings. This strategy will assist in restoring the traditional protection and diversification that

Corporate bond spreads are reaching a low point bp 900

US high yield

bonds can provide to portfolios, especially those that also contain stocks and their intrinsic risks.

600

Consider taking profits in corporate bonds Most investors severely trimmed positions in core European

300

government bonds in the aftermath of the financial crisis. We recommend adding government bonds back to your portfolio when they yield more than the inflation rate and after high yields have peaked. This may not be for some time yet, as the European Central Bank (ECB) is not in a hurry to raise interest rates. In the meantime, inflation-linked securities (which can protect against a surprise increase in inflation) are a good place to start.

14

0 Jan '10

European investment-grade corporates Oct '12

Jul '15

Apr '18

A comparison of US and European corporate bond spreads. Europe is represented by the Barclay’s Euro Investment-grade Corporate Bond Index. The Barclays US High-Yield Index represents the US. Source: Bloomberg

Tolerate the higher volatility in peripheral European bonds

market bonds in “local,” i.e. emerging-markets, currencies will also be suitable to further increase portfolio diversification.

Earlier this year, we suggested that investors increase their

Euro-based investors face foreign-exchange risk when invest-

position in Italian government bonds, as these bonds offered

ing in US bonds. We recommend hedging US dollar exposure

relatively attractive yields compared with European invest-

although, at around 2% a year, it can be costly. Nonetheless,

ment-grade corporate bonds. Despite the recent turmoil

US assets remain significant sources of portfolio diversification.

around Italy, we recommend investors hold on to these positions. We do not believe leaving the euro to be a viable option

Mary Pieterse-Bloem

for Italy. As long as Italian bonds are redeemed in euros, their

Global Head Fixed Income

attractive yields will be realised in the end. We believe that this will be the outcome over the next few years. Italy, however, has managed to put another serious dent in the reputation and sustainability of the Economic and Monetary Union of the EU, and this means that price volatility will likely remain.

Forecasts: Interest rates and bond yields 31 May

Year-end

Year-end

2018

2018

2019

Use the US and emerging markets for diversification

US Federal Reserve policy rate

1.75

2.50

3.00

With corporate spreads as low as they will probably get, we

3-month interbank rate

2.32

2.60

3.00

recommend gradually taking profits and diversifying into other

10-year Treasury

2.82

3.20

2.80

bond segments and internationally. The US bond market, where yields are closer to their peaks than in Europe, is one

Europe

example. We suggest investors consider buying US senior

ECB policy rate

-0.40

-0.40

-0.20

3-month interbank rate

-0.32

-0.33

-0.13

0.34

0.70

1.20

loans, and we expect that US mortgage-backed securities will also soon be of interest. We also advise buying emerging

10-year Bund

market bonds issued in the “hard” currencies of developed

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/

markets. The time may also come when adding emerging

Source: Thomson Reuters Datastream, ABN AMRO Group Economics

15

More focus on sustainability In just 12 years, the world will need 50% more energy, 40% more drinking water and 35% more food. These are the predictions for 2030, if current trends persist. It is a strong argument in favour of sustainable living and, relatedly, sustainable investing. It may even prompt the question, if not now, when?

environmental, social and governance responsibility. For our

Growing interest in sustainable investing

Incremental steps toward sustainability goals

sustainable investment mandates ABN AMRO invests with a focus on creating positive change in areas such as clean water, green energy, healthy living and lower carbon-dioxide emissions – to name just a few of the sustainability goals that we target.

A large number of investors are already investing in sustainable companies, and, based on a recent research study

It can sometimes be surprising how clever companies can

commissioned by ABN AMRO in the Netherlands, more are

be. For example, there is a specialist company in industrial

on the way. Our survey found that almost 40% of respond-

cleaning, such as for textiles, that after streamlining its

ents were planning to expand their sustainable portfolios

own energy use, took the next step to develop techniques

this year. What was interesting is that more investors (35%)

for customers to save energy by reducing water use and

said that they are primarily drawn to sustainable investing

lowering temperatures during washing. It eventually led

because of the performance return, with fewer (23%) taking

to reduced energy and water use – as well as costs --for

this investment approach primarily to “do something good

around 100 commercial laundries in Europe. It may not grab

in the world.” The positive attitude toward the performance

headlines, but it is an incremental step in the right direction

of sustainable portfolios is also supported by survey results.

to cope with the need for 50% more energy and 40% more

More than half of the investors with existing sustainable

drinking water by 2030.

portfolios reported that the performance of these investments is either “good or very good.” With the increased requirements on energy, water and food, it is clear that

This is not yet the status quo

there will be a lot of additional investments in this area and the companies will be able to benefit from this, supporting

In the literature about “green” investing, there is a concept

future performance.

known as “predatory delay.” It was developed by a US futurist, Alex Steffen. He defines predatory delay as “the deliber-

People, planet and profits

ate slowing of change to prolong a profitable but unsustainable status quo, whose costs will be paid by others.”

Sustainable investments are investments in the future.

We do not believe in this strategy. We believe that compa-

By investing in companies that maintain the right balance

nies that focus on doing good, in financial and sustainable

between people, the planet and profits you are investing

terms, will be the longer term winners. And we believe that

in companies with a positive perspective. These compa-

investors can benefit by investing in these companies.

nies are innovative and focus on new technologies. Our investment processes for ABN AMRO managed portfolios

Richard de Groot

support identifying sustainable companies using a system

Global Head Investment Centre

of sustainability rankings that enable us to target companies that are at the head of the class and not laggards in terms of

16

Investment Outlook | June 2018

Real estate: clear sailing ahead Real estate had a rocky start to 2018, when there was a broad-based correction across all risky assets. It has since recovered, based on stable cash flow, solid dividends and its relative attractiveness compared with other assets.

Cash-flow growth at real estate companies declined in 2017, but it has now stabilised at 2-3%, given good economic conditions in the US as well as in Europe and Asia. The amount of debt used by real estate companies is also manageable.

Even though we expect interest rates to rise, it should not have a dramatic effect on balance sheets. Most real-estate companies have refinanced their loans over the past years at very low rates and for long time periods. Finally, real estate valuations are reasonable; and dividends, at around 4%, are attractive. In comparison to the returns expected from cash or bonds, dividends from real estate companies provide a solid income stream for investors.

For euro-based investors, currency effects can have a big impact on real-estate returns. This is because the majority of real-estate companies in the global benchmark are linked to the US dollar. A stronger euro (rising EUR/USD) directly translates into a decline of the benchmark, while a weaker euro has the opposite effect. In the near-term the US dollar could strengthen somewhat which should be positive for euro-based investors. For the remainder of 2018 we don’t expect strong directional moves in the US dollar so this should stabilise returns from real estate as well.

As we look at the expected total return for real estate in 2018, we expect an attractive positive performance, although less than that of stocks. Real estate, however, has lower market risk compared to stocks. Given its income characteristics and attractive risk/return profile, we see value in holding real estate as part of a well-diversified portfolio that also includes stocks and bonds.

Piet Schimmel Senior Equity Thematic Expert

17

Private Equity: still attractive Private equity investment remains attractive to investors, driven by continued strong distributions from private-equity funds, positive investor sentiment and the search for yield.

pushed acquisition multiples to a historically high level. This results in a concern that private equity managers may be overpaying for assets. Recent market data, however, shows that purchase prices declined somewhat for both US and European buyouts in the first quarter of the year to around

Because we expect that investors will continue to invest

10x earnings before interest, taxes, depreciation and amor-

significant amounts of capital in private equity, we do not

tization (EBITDA). This indicates that prices have reached a

expect that the bulk of committed but undrawn capital (“dry

plateau and managers are prudently deploying capital.

powder”), which has grown to an all-time high of USD 1.7 trillion, will materially decrease over the next 6-12 months.

Looking only at aggregate numbers can be misleading,

About USD 633 billion of this investment capital is commit-

however. Average purchase-price multiples are often driven

ted to buyout funds, with the balance going to strategies

by larger deals trading at high multiples. But the majority

such as infrastructure, real estate and private debt.

of buyout deals (measured by number of deals) takes place in the middle-market segment where prices are generally

The high level of capital to be invested has intensified

lower.

the competition for attractive target investments and has Of course, investors might wonder if now is the time to re-enter private equity investing. As perfect market timing is virtually impossible, we believe that investors should continue investing in private equity for the following reasons.

XXPrivate

equity serves as a valuable diversification

instrument, as it captures investment opportunities that are not available through more liquid investments, such as stocks and bonds.

XXCapital commitments to private equity funds are drawn on

over multiple years, giving investors exposure to different market conditions.

XXHistorical

evidence indicates that a consistent and

disciplined investment in private-equity funds across different investment years (“vintages”) has been proven to be a critical success factor.

Of course, investors should always be selective when choosing a manager and should concentrate on investing with top-tier private-equity firms with the extensive experience that enables them to make successful deals even when prices may be high.

Oliver Schebela, Senior Investment Professional Private Equity, Andreas Hegedüsch, Senior Investment Professional Private Equity

18

Investment Outlook | June 2018

Commodities: positive long-term view The commodities market, as measured by the CRB Index, continued to rally during the first quarter of 2018, and reached its highest level in more than two years. Higher prices for oil, grains and soft commodities (mainly wheat and cocoa), as well as some base metals, such as nickel and aluminium, pushed the CRB index higher.

members, such as Saudi Arabia and Iraq. This will not lead to crude shortages in the near term. It does, however, add to the already critical situation for oil supply in the longer term. Future oil supply may prove to be insufficient to meet the rise in global demand, largely due to a lack of investment in oil upstream activities.

Renewed trade tensions between the US and China,

Both base metal and oil prices have found support, mainly

weaker economic data and waves of risk aversion could

because of the possible disruption of future supply based

result in commodity price weakness in the months ahead.

on increased geopolitical tensions, including uncertainty

Nonetheless, we remain positive on the macroeconomic

about Iran and US sanctions on Russian oligarchs. Growing

outlook and believe that economic growth should support

demand and supply-related news, such as a drop in invento-

the CRB Index in the longer term.

ries and possibly less crops next year, caused prices to rise for cocoa and wheat.

Hans van Cleef Senior Energy Economist

Price trends in aluminium and nickel will remain volatile, as long as uncertainty over US trade tariffs and sanctions persist. In zinc, rising supply in the second half of 2018 will result in weakening prices. In terms of markets, supply tightness is expected in base metals, based on a seasonal pick-up in demand and possible disruptions to supply. This should spur a recovery in risk appetite among investors.

Oil demand continues to grow For oil prices, the focus for the remainder of the year will be on supply issues, as demand continues to grow at a solid

Forecasts: Commodities 23 May 2018

Spot price

Avg 2018

End 2018

pace. It is likely that the Organisation of Petroleum Exporting

Oil

Countries (Opec) will decide to keep its production cut

Brent USD/bbl

73

71

75

agreement in place. Any policy shift would need to be well

WTI USD/bbl

68

66

70

explained by Opec in order to prevent a shock in oil prices.

Metals The US stepped out of the Iran nuclear deal and new

Gold USD/oz

1,310

1,287

1,250

sanctions against Iran will be imposed within six months.

Silver USD/oz

16.5

16.2

16

Although European parties (as well as China and Russia)

Platinum USD/oz

900

916

900

would like to continue with this agreement, Iranian exports

Palladium USD/oz

975

944

900

– mainly to Europe - will be hurt. Some of these exports can

Aluminium USD/t

2,325

2,210

2,200

be shifted to Asia. The majority of European crude imports

Copper USD/t

6,820

7,020

7,200

needs to be replaced by crude exports from other Opec

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/ Source: ABN AMRO Group Economics

19

Currencies: euro under pressure A combination of negative eurozone developments and more positive sentiment towards the US has resulted in a drop in the euro/US dollar exchange rate (EUR/USD). It is likely that euro weakness will last longer than we had expected.

2019. We expect, for example, that the US fiscal deficit will increase. And as the Federal Reserve slowly sells its large bond holdings, foreigners will likely be needed to finance the deficit. A lower US dollar will probably facilitate this process, as US Treasury bonds will then be more attractive to foreigners. In addition, the fading strength of fiscal stimulus, such

There are a number of factors behind the weakening of the

as tax reforms, and a tighter monetary policy will slow down

EUR/USD. Taken all together, we think that for the coming

the US economy.

months, there is more weakening to come. Our new forecasts for the end of June, September and December are

We expect economic growth and US Treasury yields to peak

1.15 (previously 1.21), 1.10 (previously 1.21) and 1.15 (previ-

towards the end of 2018, and this will be negative for the

ously 1.20) respectively.

US dollar in 2019. It is also unlikely that the Fed will hike more than the market expects, which is two 25 basis-point

The reasons for the weakening of the EUR/USD include the

hikes in 2019. Taken all together, these drivers point to a

following:.

lower US dollar. Our year-end 2019 EUR/USD forecast is

XXThe

now 1.25 (previously 1.30).

stress in the Italian bond market is far from over. This

will weigh on the euro.

XXNet-long

Georgette Boele

euro positions remain very large. With the EUR/

Senior FX Strategist

USD being below its 200-day moving average, a further deterioration in sentiment towards the euro will likely result in a scaling-back of these net-long positions.

XXIn

the near term, there is much more uncertainty about

the outlook for growth in the eurozone than the outlook for the US. This will also leave its mark on the euro, until eurozone data would start to surprise very positively.

We continue to expect a recovery of eurozone economic growth. Fundamentals are consistent with an above-trend expansion continuing. But, it may take longer for the data

Currencies forecasts FX pair

Spot 29 May

Q4 2018

Q4 2019

2018

to turn sufficiently to allay market concerns. continue to believe that investors are somewhat too

EUR/USD

1.1571

1.15

1.25

optimistic about ECB rate hikes in 2019. On balance, the

USD/JPY

108.75

110

100

market expects the ECB to hike rates in the summer of 2019,

EUR/JPY

125.84

127

125

while we expect the ECB to wait until September 2019.

GBP/USD

1.3241

1.34

1.42

This should also result in a lower EUR/USD, especially if the

EUR/GBP

0.8739

0.86

0.88

Federal Reserve continues its steady course of rate hikes.

USD/CHF

0.9930

1.06

1.00

EUR/CHF

1.1490

1.22

1.25

USD/CAD

1.2999

1.28

1.18

EUR/CAD

1.5041

1.47

1.48

USD/CNY

6.42

6.50

6.70

USD/BRL

3.74

3.70

3.20

XX We

Dollar to weaken in 2019 In the longer term, we continue to expect the US dollar to weaken, mainly because of weaker US fundamentals in

20

Updates to ABN AMRO forecasts can be found at https://insights.abnamro.nl/en/ Source: ABN AMRO Group Economics

Investment Outlook | June 2018

Asset allocation profiles ABN AMRO’s Global Investment Committee model portfolio risk profiles in percent, starting with the most conservative (Profile 1) and ending with that most exposed to market risks (Profile 6).

Asset allocation

Profile 1 Strategic Neutral Min.

Money markets

Profile 2 Current

Deviation

Max.

Strategic Neutral

Min.

Current

Deviation

Max.

5

0

60

32

27

5

0

70

16

11

90

40

100

63

-27

70

30

85

50

-20

Equities

0

0

10

0

0

15

0

30

19

4

Alternative investments

5

0

10

5

0

10

0

20

15

5

Bonds

Funds of hedge funds

5

5

0

5

5

0

Real estate

0

0

0

3

8

5

Commodities

0

0

0

2

2

0

Total Exposure

100

100

Asset allocation

100

100

Profile 3 Strategic Neutral Min.

Profile 4 Current

Deviation

Max.

Strategic Neutral

Min.

Current

Deviation

Max.

5

0

70

11

6

5

0

70

5

0

Bonds

55

20

70

39

-16

35

10

55

25

-10

Equities

30

10

50

35

5

50

20

70

55

5

Alternative investments

10

0

20

15

5

10

0

30

15

5

Money markets

Funds of hedge funds

5

5

0

5

5

0

Real estate

3

8

5

3

8

5

Commodities

2

2

0

2

2

0

Total Exposure

100

100

Asset allocation

100

100

Profile 5 Strategic Neutral Min.

Profile 6 Current

Deviation

Max.

Strategic Neutral

Min.

Current

Deviation

Max.

5

0

70

2

-3

5

0

60

3

-2

Bonds

15

0

40

11

-4

0

0

25

0

0

Equities

70

30

90

75

5

85

40

100

87

2

Alternative investments

10

0

30

12

2

10

0

30

10

0

Money markets

Funds of hedge funds

5

5

0

5

5

0

Real estate

3

5

2

3

3

0

Commodities

2

2

0

2

2

0

Total Exposure

100

100

100

100

The current asset allocation reflects active strategies that account for medium- and short-term views and represents a deviation from the longer-term strategic asset allocation.

21

Contributors ABN AMRO Global Investment Committee Richard de Groot

richard.de.groot@nl.abnamro.com

Global Head Investment Centre

Han de Jong

han.de.jong@nl.abnamro.com

Chief Economist

Reinhard Pfingsten

reinhard.pfingsten@de.abnamro.com

Global Head Asset Allocation Services

Olivier Raingeard

olivier.raingeard@fr.abnamro.com

Global Head Equity

Mary Pieterse-Bloem

mary.pieterse-bloem@nl.abnamro.com

Global Head Fixed Income

Georgette Boele

georgette.boele@nl.abnamro.com

Senior FX Strategist

Hans van Cleef

hans.van.cleef@nl.abnamro.com

Senior Energy Economist

Olivier Raingeard

olivier.raingeard@fr.abnamro.com

Global Head Equity

Paul van Doorn

paul.van.doorn@nl.abnamro.com

Senior Portfolio Manager, Equities

Bastian Ernst

bastian.ernst@nl.abnamro.com

Portfolio Manager, Equities

Maurits Heldring

maurits.heldring@nl.abnamro.com

Equity Research & Advisory Expert

Rainer Kloppert

rainer.kloppert@de.abnamro.com

Senior Portfolio Manager, Equities

Eric Lafrenière

eric.lafreniere@fr.abnamro.com

Senior Portfolio Manager, Equities

Esther van Munster

esther.van.munster@nl.abnamro.com

Senior Portfolio Manager, Equities

Jaap Rijnders

jaap.rijnders@nl.abnamro.com

Equity Research & Advisory Expert

Sandra Saidi

sandra.saidi@fr.abnamro.com

Senior Portfolio Manager, Equities

Piet Schimmel

piet.schimmel@nl.abnamro.com

Senior Equity Thematic Expert

Mary Pieterse-Bloem

Mary Pieterse-Bloem@nl.abnamro.com

Global Head Fixed Income

Roel Barnhoorn

roel.barnhoorn@nl.abnamro.com

Senior Fixed Income Thematic Expert

Florian Bardy

florian.bardy@fr.abnamro.com

Fixed Income Portfolio Manager

Willem Bouwman

willem.bouwman@nl.abnamro.com

Fixed Income Portfolio Manager

Chris Huys

chris.huys@nl.abnamro.com

Senior Fixed Income Portfolio Manager

Fidel Kasikci

fidel.kasikci@de.abnamro.com

Senior Fixed Income Portfolio Manager

Torben Kruhmann

torben.kruhmann@de.abnamro.com

Fixed Income Portfolio Manager

Jacques Verdier

jacques.verdier@fr.abnamro.com

Senior Fixed Income Portfolio Manager

Reinhard Pfingsten

reinhard.pfingsten@de.abnamro.com

Global Head Asset Allocation Services

Paul Groenewoud

paul.groenewoud@nl.abnamro.com

Quant Risk Specialist

Martien Schrama

martien.schrama@nl.abnamro.com

Product Manager

Chris Verzijl

chris.verzijl@nl.abnamro.com

Product Manager

Romeo Chamman

romeo.chamman@nl.abnamro.com

Product Manager

Arkadi Odintsov

arkadi.odintsov@nl.abnamro.com

Quant Risk Specialist

Thomas Domeratzki

thomas.domeratzki@ de.abnamro.com

Senior Strategist

Steffen Kunkel

steffen.kunkel@de.abnamro.com

Senior Strategist

Oliver Schebela

oliver.schebela@de.abnamro.com

Senior Investment Professional Private Equity

Andreas HegedĂźsch

andreas.hegeduesch@de.abnamro.com

Senior Investment Professional Private Equity

Group Economics

Global Investment Centre

Private Equity

22

Investment Outlook | June 2018

Disclaimers General: The information provided in this document has been drafted by ABN AMRO Bank N.V. and is intended as general

US Person US Securities Law Disclaimer: ABN AMRO Bank N.V.

information and is not oriented to your personal situation.

(‘ABN AMRO’) is not a registered broker-dealer under the U.S.

The information may therefore not expressly be regarded as

Securities Exchange Act of 1934, as amended (the ‘1934 Act’)

a recommendation or as a proposal or offer to 1) buy or trade

and under applicable state laws in the United States. In addi-

investment products and/or 2) procure investment services nor

tion, ABN AMRO is not a registered investment adviser under

as an investment advice. Decisions made on the basis of the

the U.S. Investment Advisers Act of 1940, as amended (the

information in this document are your own responsibility and

‘Advisers Act’ and together with the 1934 Act, the ‘Acts’), and

at your own risk. The information on and conditions applicable

under applicable state laws in the United States. Accordingly,

to ABN AMRO-offered investment products and ABN AMRO

absent specific exemption under the Acts, any brokerage and

investment services can be found in the ABN AMRO Investment

investment advisory services provided by ABN AMRO, includ-

Conditions (Voorwaarden Beleggen ABN AMRO), which are

ing (without limitation) the investment products and investment

available on www.abnamro.nl/beleggen.

services described herein are not intended for U.S. persons.

Neither this document, nor any copy thereof may be sent to or

Although ABN AMRO attempts to provide accurate, complete

taken into the United States or distributed in the United States

and up-to-date information, which has been obtained from

or to a US person.

sources that are considered reliable, ABN AMRO makes no representations or warranties, express or implied, as to whether

Other jurisdictions: Without limiting the generality of the

the information provided is accurate, complete or up-to-date.

foregoing, the offering, sale and/or distribution of the investment

ABN AMRO assumes no liability for printing and typographi-

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cal errors. The information included in this document may be

any jurisdiction to any person to whom it is unlawful to make such

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Liability: Neither ABN AMRO nor any of its agents or subcon-

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tractors shall be liable for any damages (including lost profits)

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ABN AMRO cannot be held responsible for any damages or losses

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that occur from transactions and/or services in defiance with the restrictions aforementioned.

Copyrights & distribution: ABN AMRO, or the relevant owner, retains all rights (including copyright, trademarks, patents and any other intellectual property right) in relation to all the information provided in this document (including all texts, graphic material and logos). The information in this document may not be copied or in published, distributed or reproduced in any form without the prior written consent of ABN AMRO or the appropriate consent of the owner. The information in this document may be printed for your personal use.

23

Offices ABN AMRO MEESPIERSON AMSTERDAM Jan Willem Hofland jan.willem.hofland@nl.abnamro.com BANQUE NEUFLIZE OBC S.A. PARIS Wilfrid Galand wilfrid.galand@fr.abnamro.com BETHMANN BANK AG FRANKFURT Thomas Henk thomas.henk@bethmannbank.de ABN AMRO PRIVATE BANKING LUXEMBOURG Jean-Marie Schmit jean.marie.schmit@lu.abnamro.com ABN AMRO PRIVATE BANKING ANTWERPEN - BERCHEM Erik Joly erik.joly@be.abnamro.com ABN AMRO PRIVATE BANKING CHANNEL ISLANDS Patrick Millar patrick.millar@gg.abnamro.com

This publication is produced by the Global Investment Communications team. If you have questions or comments, contact the team at I-Comms.Global@nl.abnamro.com.

www.abnamroprivatebanking.com